Filing Scope and Business Context
The provided filing is Lancaster Colony Corporation’s Form 10-K for the fiscal year ended June 30, 2019, not a Marzetti Co. filing or a filing solely for 2018 Q4. Lancaster Colony manufactures and markets specialty food products through Retail and Foodservice segments, including Marzetti-branded products. Fiscal 2019 covers July 1, 2018 through June 30, 2019. More than 95% of sales were generated in the United States.
The filing separately reports unaudited fourth-quarter fiscal 2019 results for the quarter ended June 30, 2019.
Financial Performance and Position
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Net sales | $1,307.8 million | $1,222.9 million | Up 7% |
| Gross profit | $326.2 million | $303.5 million | Up 7% |
| Gross margin | 24.9% | 24.8% | Up 10 basis points |
| Operating income | $190.9 million | $171.5 million | Up 11% |
| Operating margin | 14.6% | 14.0% | Up 60 basis points |
| Net income | $150.5 million | $135.3 million | Up 11% |
| Diluted EPS | $5.46 | $4.92 | Up 11% |
| Operating cash flow | $197.6 million | $160.7 million | Up 23% |
- Retail sales were $656.6 million, up 1%; Retail operating income was $135.1 million, up 7%, and margin was 20.6%.
- Foodservice sales were $651.2 million, up 14%; Foodservice operating income was $73.8 million, up 26%, and margin was 11.3%.
- Cash and equivalents totaled $196.3 million at June 30, 2019, compared with $205.8 million at June 30, 2018.
- The Company reported no borrowings and no long-term debt. Its revolving credit facility provided up to $150 million of borrowing capacity, reduced by $5.1 million of standby letters of credit.
- Shareholders’ equity was $726.9 million, compared with $652.3 million in the prior year.
- Capital expenditures were $70.9 million, compared with $31.0 million in fiscal 2018. Cash used in investing activities was $126.9 million, primarily reflecting acquisitions and higher capital spending.
- Cash used in financing activities was $80.2 million, including $70.1 million of dividends and $7.4 million of share repurchases and related treasury-stock activity. The regular dividend increased to $2.55 per share, marking the 56th consecutive annual increase.
- Total contractual obligations were $290.7 million, including $239.0 million of purchase obligations, $38.3 million of operating lease obligations and $2.1 million of capital lease obligations.
Fourth-Quarter Fiscal 2019 Results
| Metric | Q4 Fiscal 2019 | Q4 Fiscal 2018 |
|---|---|---|
| Net sales | $323.7 million | $308.2 million |
| Gross profit | $78.2 million | $76.2 million |
| Net income | $33.0 million | $32.4 million |
| Diluted EPS | $1.20 | $1.18 |
Fiscal 2019 fourth-quarter results included an after-tax ERP expense of approximately $1.4 million, or $0.05 per diluted share, and after-tax restructuring and impairment charges of approximately $1.3 million, or $0.05 per diluted share. The quarter also included an after-tax benefit of approximately $5.7 million, or $0.21 per diluted share, from reducing the fair value of Angelic Bakehouse contingent consideration.
Material Changes Versus the Prior Comparable Period
- Consolidated sales growth was driven by both segments, with particularly strong Foodservice growth. Excluding Bantam Bagels and Omni Baking Company, consolidated sales increased approximately 5%.
- Foodservice benefited from national-chain accounts, branded products, frozen pasta and contributions from the acquisitions. Excluding acquisition contributions, Foodservice sales increased 9%.
- Retail growth was limited by declines in flatbread wraps and the selective exit from lower-margin private-label business. Retail operating income benefited from a $17.1 million reduction in Angelic contingent consideration; excluding that benefit, Retail operating income declined to approximately $118.0 million.
- Fiscal 2019 included the acquisitions of Bantam Bagels for a base purchase price of $33.1 million and Omni Baking Company for $22.3 million, funded with cash on hand.
- Gross profit improved through higher Foodservice volume, lean Six Sigma savings and improved pricing, partially offset by Omni facility costs, Bantam distribution investments and higher warehousing costs.
- SG&A increased 15% to $149.8 million, reflecting acquisitions, higher personnel and business-initiative spending, professional fees and $1.8 million of ERP expenses.
- The effective tax rate increased to 23.0% from 22.3%. Fiscal 2018 benefited from a $9.5 million one-time deferred-tax benefit related to the Tax Cuts and Jobs Act.
- Fiscal 2019 operating income included a $16.2 million net benefit from changes in contingent consideration and $1.6 million of restructuring and impairment charges. Fiscal 2018 included a $2.1 million contingent-consideration expense.
Guidance, Outlook, Risks and Unusual Items
Management did not provide formal numerical revenue or earnings guidance. For fiscal 2020, management expected continued Retail growth from Bantam, licensed shelf-stable dressings and sauces, and new products. Foodservice was expected to benefit from selected national-chain accounts, branded products, and incremental Bantam and Omni sales.
- Management expected incremental Omni integration, facility-upgrade and operating costs through the first half of fiscal 2020, as well as continued ERP and other strategic-investment spending.
- Planned fiscal 2020 capital expenditures were estimated at $80 million to $100 million, including approximately $33 million of remaining payments for the Horse Cave, Kentucky frozen-dinner-roll capacity expansion expected to be completed in mid-2020.
- Management anticipated higher commodity, packaging and freight costs in fiscal 2020, with pricing actions, lean Six Sigma savings, procurement initiatives and transportation efficiencies expected to offset some of the pressure.
- The Company committed in the fourth quarter to close its Saraland, Alabama frozen-bread plant. Production ceased in July 2019, and the closure generated $1.6 million of restructuring and impairment charges plus $0.2 million of inventory write-downs. The lease runs through November 2020.
- The Company is implementing a multi-year ERP system, creating execution, cost, internal-control and operational-disruption risks. It expected to recognize $30 million to $40 million of lease right-of-use assets and liabilities upon adopting the new lease standard on July 1, 2019, without an expected effect on earnings or cash flows.
- Material business risks include dependence on Walmart, McLane and a single indirect national-chain restaurant account. Fiscal 2019 sales represented 17% of consolidated sales for Walmart, 15% for McLane and 14% for the single indirect national-chain account.
- Other principal risks include food-safety incidents and recalls, raw-material and freight inflation, competition and private-label pressure, manufacturing concentration, third-party suppliers, customer concentration, labor negotiations, cyber incidents, acquisitions and contingent liabilities.
- The Company remained exposed to potential increased contributions or withdrawal liability related to its remaining multiemployer pension plan. The Bedford Heights collective bargaining agreement covering approximately 5% of employees expires April 30, 2020.
- Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditors concluded that internal controls were effective as of June 30, 2019.
Important Facts for Investors to Verify
- Confirm the requested issuer and period: the supplied document is Lancaster Colony Corporation’s fiscal 2019 Form 10-K, not a standalone Marzetti Co. 2018 Q4 filing.
- Separate recurring operating performance from the $17.1 million Angelic contingent-consideration benefit and the $1.6 million restructuring and impairment charge.
- Assess whether Foodservice growth, Bantam and Omni integration, and the transitional Omni supply arrangement remain sustainable after fiscal 2019.
- Monitor Retail performance excluding acquisition effects, particularly flatbread declines, private-label exits and licensed-product growth.
- Evaluate the return on the elevated capital program, including the Horse Cave expansion, the new R&D center, automation projects and ERP implementation.
- Review exposure to Walmart, McLane and the large indirect national-chain account, including the absence of long-term purchase commitments.
- Track commodity, packaging, labor and freight costs against pricing actions and lean Six Sigma savings.
- Review the Bantam earn-out, which had a $8.9 million fair value at June 30, 2019 and is based on future adjusted EBITDA with no stated minimum or maximum value.
- Consider liquidity after acquisitions, capital spending, dividends and share repurchases, notwithstanding the Company’s cash-rich, debt-free position.